accounting

5 Tips for Making Sound Financial Projections

A healthy trait for entrepreneurs, optimism helps small business owners stick it out through lean times while building a successful company. But a healthy dose of caution comes in handy when it comes to making financial projections. Overly rosy income predictions can sometimes lead you to make imprudent financial decisions.

Whether you’re projecting the year to come or looking several years down the road, solid, reality-based projections provide a crucial road map for small business growth. Here are some tips to help you assess your success and make smart decisions for your small business’s growth.

Predict Problems With Cash Flow Projections

One of the most useful steps you can take to plan for smooth financial sailing is to project cash flow. You can do this by estimating the amount of cash you expect to have on hand at the end of each period after you pay yourself and your employees and meet your tax obligations. Projecting your cash flow allows you to calibrate big expenses, such as capital purchases, with times of the year when your small business has more cash on hand. By highlighting times when you might run short on money, your cash flow projection shows you how to focus your energies if you wish to invest in boosting revenue without leaving yourself strapped for cash at an inopportune moment.

Base Decisions on Your Break-Even Point

Your break-even point refers to the juncture where total revenue and total expenses are equal. A crucial element of small business financial projections, a break-even point analysis requires you to know three things: your monthly fixed costs, variable cost per unit, and the average price per unit. To find your break-even point, subtract the average price per unit from your average cost per unit. This gives you your average profit per unit. Then divide your fixed costs by this number.

For example, if you have fixed costs of \$10,000, an average price per unit of \$80, and average cost per unit of \$30, you subtract \$30 from \$80 to get \$50, and then divide \$10,000 by that number. This gives you a break-even point of 200. This means you need to sell 200 units to balance out your fixed costs and revenue. Since you obviously want to make a profit, knowing that you need to sell a certain amount of units lets you shoot for realistic growth and take steps to boost your sales.

Project, Revise, and Repeat

When you make financial projections, keep track of them throughout the year to assess your small business’ health. Compare your projections with your actual numbers to make better predictions for the future and work through any issues that might be affecting growth. With those things in mind, adjust your projections to take account of any changes your business experiences. By that same token, track your revised financial projections and revise them over and over again to stay on top of your company’s bottom line.

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